Property management advice please

Tom V. · 2016-06-02T18:39:58-07:00

So, I don't own any investment properties yet, but since I'm already very busy with my main business I'm considering using property management right from the start. The metro area I'm investing in is located in Iowa, and only has around 100,000 people, so the property management options are pretty limited.There is one large realty company here that has a property management division. This realty company is the biggest in the area, and probably has 75% of all real estate listings for the area, both residential and commercial. I've seen their ads on Craigslist advertising properties for rent, and the ads look very professional with good photos.I sent an initial inquiry email to the head of the division and also to his admin assistant (on Friday morning before Memorial day weekend). I got replies back from both of them within 2 hrs. The chief said he was out of the office until next week, but he would have the admin assist get me the info I requested, which she did. At this point I was very impressed with the speedy service.Below the dotted line is the info that I received regarding how they operate. Obviously there are a lot of other more specific questions that need to be asked yet ( I have a list), but I'm looking for some feedback on whether the rates, fees, and policies seem to be in line with industry standards.To my knowledge, it all looks pretty reasonable to me, but I'd love for some of you real estate wizards to have a look and confirm it. Thanks!!--------------------------------------------Thomas,Our responses to your inquiry are below, and I have also attached a blank Residential Management Agreement for your review.1. Rate and fee schedule / pricing model. We usually charge 10% of rents, and a one time additional 25% the first full month a new tenant is placed for all the screenings, calls, showings, etc. In addition, if the tenant signs a year lease extension, we charge a 10% fee for that. We pay the residential owners (by direct deposit is preferred) and send reports generally by the 15th of each month, provided all tenants have paid rents and there are no outstanding maintenance or utility bills. We pay all remaining residential and commercial owners at the end of the month, again, provided the tenants have paid and there are no outstanding bills. All reports are available on the Owner Portal to go back and review and print at any time.2. Tenant screening processes. We use a screening service through our software that provides a criminal, rental/evictions and financial/collections background check. All prospective tenants are screened prior to showing property, and the applicant pays for that cost.3. Property maintenance and repairs processes. We have a portal that tenants can report maintenance issues, or they can call us. We have someone on call 24/7 for after hours repairs, and that person gets ahold of Beau with any questions or approvals. We have a number of contractors and vendors available who provide timely repairs. We do charge a 7% upcharge for arranging and overseeing all the repairs needed and paying the vendors. Beau also does inspections two times per year so that anything not reported by the tenants can be addressed.4. Rent collection and owner payment processes. We have online, in person, by mail, cash, money order or check payment receipts. If they bounce, they are required to pay by money order, cash or cashier’s check, not online. If they bounce more than once, they are not allowed to pay online.5. Tenant turnover and eviction processes. We serve a 3 day notice on all tenants that are not paid by the 8th of the month. We do not accept ANY funds unless it is IN FULL and then file the FED the 8th day after if they have not paid in full. Beau goes to court on the FED hearing.

Tony Cook

Baltimore, MD · Member since 2015 · 30 posts · 6 votes

10y

I work for a property management company in Baltimore and a few things I will tell you are : 1. Don't let them keep the late fees if the tenant is late 2. Don't let them markup the invoices and overcharge you 3. Don't let them charge you a renewal fee. If you are paying 10% (which is pretty standard) and a leasing fee up front to place the tenant, then there shouldn't be any other charges. I don't know what the rent is on the property you have in mind, but if they are getting $100.00/month for collecting rent and basically paying it to you , then that should be enough. If a repair needs to be done, then they would probably send an in house tech and get income off that job as well. If your rent is really low then I recommend you negotiate a flat rate management fee and a flat leasing fee and roll with that .

3 Reply

Trevor Sie-Duke

Bowie, MD · Member since 2016 · 38 posts · 2 votes

10y

Are property management companies willing to negotiate?

0 Reply

Patrick LiskaPro Member

Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes

10y

Sounds like a lot of fees with that PM co. 10% is about going rate to manage the property, but adding 7% to send a contractor to do a repair, no, that's their job and what you pay the 10% for. then to charge you 25% for first month as a signing fee or 10% if its an extension. here is what your first month will look like, new tenant, lets say $700 rent - fee's = 10%- $70, 25% - $175, leaving you with $455. what about advertising costs, will they charge for that too ? and i don't like that they wait a whole month before you get the money they collect on the 1st ( they seem like they make sure its in their account to collect interest first then they distribute. And i would also demand they send you a statement every month, even if rent is paid or not, sounds like a way for them not to send you statements, and its always good to check their numbers, i would demand it be sent. and to answer @Trevor Sie-Duke, yes you can negotiate almost every aspect of the agreement, my PM normally charges 10% to manage properties, but they do it for me at 8%, and i have negotiated other terms with them as well.

1 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

@Tony Cook Thanks for the info Tony, much appreciated.

@Patrick Liska Thanks Patrick. I agree that the additional fees besides the 10% monthly seem a bit much. I calculated out a hypothetical year of costs that included 1 tenant turnover and added 7% to my maintenance estimate to account for their upcharges. With the extra fees added in, the grand total over the course of a year ended up being closer to 16% of gross rents. Yikes.

It's a pretty large company, and the chief of the property mgmt division doesn't actually own the company, he just works for them, so I'm doubtful that he will have any ability to adjust pricing or policy. But, I will certainly ask.

0 Reply

Phil Earley

Property Manager · Cumming, GA · Member since 2015 · 261 posts · 199 votes

10y

The largest expense every landlord should guard against are vacancy costs. Most of the ancillary fees don't come into play if the home is in great shape, the screening is done properly, and whoever is managing is good at managing.

Ask about tenant retention percentages, turn key expenses, the percentages of delinquent accounts, eviction percentages, etc.. to really determine what company is going to be better for your cash flow.

One missed rent check just doubled our expenses.

2 Reply

Nathan MillerPro Member

Property Manager · Grants Pass, OR · Member since 2009 · 429 posts · 201 votes

10y

@Tom V. - I would ask them to elaborate on their tenant screening practices. What do they check? Is it a full compliment of credit, criminal, and eviction or do they save themselves money by only doing one or two of the above? Also, what are the specific criteria they use when evaluating those reports.

As Phil said, vacancies are the most expensive thing to you so you want to make sure they are putting in A+++ tenants into your properties so they take care of the place, stay a long time, and pay their rent, and never cause you to have to deal with an eviction.

1 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

@Phil Earley Thanks, Phil. I'll be sure to ask about those issues you suggested.

@Nathan Miller The tenant screening issue definitely has me concerned, mainly because the PM company makes money when there is tenant turnover. I really see no motivation for them to get good quality tenants that will stay for a long time since they make money when tenant turnover happens, and they make a 7% up charge when repairs are needed.

If they were solely focused on profits, they would actually WANT to place bad tenants so that there would be more turnover, and more repairs needed, thus increasing their profit from those fees. The whole money-motivation concept here seems way out of whack with this PM company.

Am I wrong about this?

1 Reply

Nathan MillerPro Member

Property Manager · Grants Pass, OR · Member since 2009 · 429 posts · 201 votes

10y

Hi @Tom V. - I think a property manager generally makes less money if there is high turnover. They also want low vacancy rates and rent coming in every month. While they may charge you a placement fee, that fee just covers the cost of advertising the unit and sending staff out to show it to prospective tenants. Where they really make money is on their PM fees which is usually a percentage of the rent collected or billed. When a unit is vacant, there's no rental income which is bad for them. There's also their whole image to think about.

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

10y

Lots of turnover and lots of repairs = a great year for them. Fundamental goals and purpose between the owner and PM are not aligned. Manage yourself if it's in your area.

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

10y

Originally posted by @Nathan Miller:

Hi @Tom V. - I think a property manager generally makes less money if there is high turnover. They also want low vacancy rates and rent coming in every month. While they may charge you a placement fee, that fee just covers the cost of advertising the unit and sending staff out to show it to prospective tenants. Where they really make money is on their PM fees which is usually a percentage of the rent collected or billed. When a unit is vacant, there's no rental income which is bad for them. There's also their whole image to think about.

Tom, the fee vs work math shows it benefits PMs to have turnover . Even with a 'low' placement fee of a half month's rent, you are still getting 6 month's worth of mgt fees in one chunk. Most are 9.

I 've self-managed 3 dozen rentals for over a dozen years and don't believe a PM experiences that much in hard costs for advertising and sending people over to do showings. Nobody expects it done for free, but hundreds and hundreds of dollars?

I get that it's a tough business to be in. I chose not to bother with managing for others a long time ago. The fees add up fast (repair issues aside even) and keep me from hiring a PM. Cheers!

2 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

@Steve Vaughan Thanks for your responses, Steve. I appreciate it.

0 Reply

Kevin FoxPro Member

Real Estate Agent · San Diego, CA · Member since 2014 · 1k+ posts · 635 votes

10y

Hey @Tom V.

Every company/market will be slightly different, but my team and I manage slightly over 400 properties here in San Diego and our one and only fee is 8% of collected rents.

We aren't making money unless the rents are rolling in (aligning incentives), but more importantly we aren't incentivized to incur costs, increase turnover, or anything else of the sort at the expense of our clients.

Personally, I think this is the only acceptable fee structure for management.

7 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

Originally posted by @Kevin Fox:

Hey @Tom V.

Every company/market will be slightly different, but my team and I manage slightly over 400 properties here in San Diego and our one and only fee is 8% of collected rents.

We aren't making money unless the rents are rolling in (aligning incentives), but more importantly we aren't incentivized to incur costs, increase turnover, or anything else of the sort at the expense of our clients.

Personally, I think this is the only acceptable fee structure for management.

Hi Kevin, thanks for responding. I agree completely.

1 Reply

Kevin FoxPro Member

Real Estate Agent · San Diego, CA · Member since 2014 · 1k+ posts · 635 votes

10y

Originally posted by @Tom V.:

Originally posted by @Kevin Fox:

Hey @Tom V.

Every company/market will be slightly different, but my team and I manage slightly over 400 properties here in San Diego and our one and only fee is 8% of collected rents.

We aren't making money unless the rents are rolling in (aligning incentives), but more importantly we aren't incentivized to incur costs, increase turnover, or anything else of the sort at the expense of our clients.

Personally, I think this is the only acceptable fee structure for management.

Hi Kevin, thanks for responding. I agree completely.

My pleasure. It's worth noting that it's certainly possible that the 8% fee structure is only feasible for my company since the market rents in San Diego are as high as they are.

Even with that being the case; I'm still not a fan of incentivizing vacancy, frivolous repairs, and late payments from tenants.

I know your options are limited, but I'd definitely recommend continuing to look around. I'm sure you can find a hungry, qualified agent who would love to take over management for you.

5 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

Originally posted by @Kevin Fox:

My pleasure. It's worth noting that it's certainly possible that the 8% fee structure is only feasible for my company since the market rents in San Diego are as high as they are.

Even with that being the case; I'm still not a fan of incentivizing vacancy, frivolous repairs, and late payments from tenants.

I know your options are limited, but I'd definitely recommend continuing to look around. I'm sure you can find a hungry, qualified agent who would love to take over management for you.

Thanks. There are a couple of other options in my area (literally 2), and they are both real estate agents who manage properties on the side. They are both a 1 person operation, and the thing I don't like about that is what happens when they decide to change careers or move away? Now I'm looking for new PM all over again. I liked the idea of using the larger PM company because I have faith that they will be around for the long haul, but if it's going to cost a ton to have that, I'll probably end up going with the little guy.

2 Reply

Kevin FoxPro Member

Real Estate Agent · San Diego, CA · Member since 2014 · 1k+ posts · 635 votes

10y

Hey @Tom V.

While there is obviously some risk that comes with going the route of the 'little guy,' the alternative is to continue feeding into the giant that's monopolized your local property management industry and set such a ridiculous market fee structure.

The only way to change the norm is to help set new standards. I'm not saying that either of the two agents you have at your disposal are necessarily up to the task, but it's certainly not out of the question that they are.

Just as they could choose other careers and move on, they could also break into the market with their more reasonable fee structure and begin fighting the local PM giant for market share.

Again, I have no insight at all about the ability of these two particular agents, but the alternative isn't at all ideal. So, I think it's worth giving them a call.

3 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

Originally posted by @Kevin Fox:

Hey @Tom V.

While there is obviously some risk that comes with going the route of the 'little guy,' the alternative is to continue feeding into the giant that's monopolized your local property management industry and set such a ridiculous market fee structure.

The only way to change the norm is to help set new standards. I'm not saying that either of the two agents you have at your disposal are necessarily up to the task, but it's certainly not out of the question that they are.

Just as they could choose other careers and move on, they could also break into the market with their more reasonable fee structure and begin fighting the local PM giant for market share.

Again, I have no insight at all about the ability of these two particular agents, but the alternative isn't at all ideal. So, I think it's worth giving them a call.

Great points, thanks again!

0 Reply

Kevin FoxPro Member

Real Estate Agent · San Diego, CA · Member since 2014 · 1k+ posts · 635 votes

10y

@Tom V.

Anytime!

Feel free to shoot me a PM if you'd like me to review any other management proposals you receive.

Otherwise, best of luck in finding a great manager!

1 Reply

Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

10y

@Tom V. Assuming they do a good job, their fee's seem more than reasonable to me. A 25% lease up fee is well below industry average. I wouldn't be concerned with a 10% renewal fee with just a 25% initial lease up fee. Be careful of hammering your PM on fee's. The most important thing is to get good management at a reasonable fee. I see people quibble over 1 or 2 percent if the PM does a good job. Is it worth it for about $20 a month?

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

10y

@Tom V.

I have never used a PM on long term rental. The family uses one on a short term rental but that is very different.

With respect to item 2...

Seeing I manage my own properties I have experience on collecting the application fee. For every person who indicates they are going to submit an application I estimate only 1 of 3 does.

If I tried to charge the application fee before showing the property I suspect I would get no one to come see the property. I am surprised that there is any market that can collect application fee prior to showing the unit. Maybe it is standard where you are located but here my units would sit vacant with that policy.

Good luck

0 Reply

Joseph S.

Investor · Lynchburg, VA · Member since 2016 · 37 posts · 24 votes

10y

@Tom V. While I haven't used a PM myself, I've explored the market in FL because if I accumulate any more properties (currently have 2 SFHs) or switch to multi-family I'll probably start using a PM. The fees you are quoted seem very high to me based on what I've seen. Kudos to @Kevin Fox for acknowledging the same even though he is a PM himself and could have tried to "protect his own".

The only 2 folks who think the fees you were quoted were reasonable were PMs who seem to just want to protect the industry and allow for extraordinarily high fees. I've seen the same tactics in other forms discussing if you should negotiate with your real estate agent about their commission. Real estate agents come rushing to post that you shouldn't care about the fees because you should just focus on the quality of the service.

The bottom line is that simply because someone charges more doesn't mean you are going to get quality service. Less expensive PMs might provide great service and more expensive PMs might provide poor service. Decisions should be made based on the price charged and the quality of the service.

2 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

Originally posted by @Mike D'Arrigo:

@Tom V. Assuming they do a good job, their fee's seem more than reasonable to me. A 25% lease up fee is well below industry average. I wouldn't be concerned with a 10% renewal fee with just a 25% initial lease up fee. Be careful of hammering your PM on fee's. The most important thing is to get good management at a reasonable fee. I see people quibble over 1 or 2 percent if the PM does a good job. Is it worth it for about $20 a month?

I agree, the most important thing is getting GOOD management at a reasonable fee. I would not want to learn this the hard way by just going with the cheapest option I can find. However, I also want to make sure I'm not paying more than I should be. I'm getting mixed answers from the forum, some say these PM fees are reasonable, and some say they are overpriced.

0 Reply

James Mc Ree

Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 934 votes

10y

@Tom V Why do you want to invest in real estate? Naturally, everyone wants to make money, but it appears you have a time conflict: your growing business potentially versus your real estate empire. You should think about the extent to which you are willing to make that tradeoff and what impact on your business you are willing to accept.

I think there is tremendous value in understanding real estate rental operations with your first or first few properties. Outsourcing all of that means you could learn nothing and become a hostage to your management company. For example, you can replace a gas water heater for $900 or $1800 depending on who you call around my area. It will be the same water heater, same warranty and both jobs will be done well. Which company will the PM firm call? Is it the same if they get a % of cost?

You have probably read that real estate investing is really all about people. Good tenants = good experience, bad tenants = something else. What will your PM firm do for you besides provide screening data? Does the firm select the tenant or you? If the firm selects, do they provide a rent or tenant guarantee? If you select, you need to decide what to do with someone with spotty credit, past drug use and a low credit score. Screening data is cheap. Good screening is invaluable.

Thinking only in terms of money, I think of real estate investing as a bond investment that requires a lot more work than a bond and is sometimes unreliable (vacancy). You hope to get a steady rent with some steady expenses to obtain an annual yield. You might want to consider a more passive investment if that is the extent of your desired involvement. CrowdSourcing real estate might work for you in that case as you can still pull 9% or more with debt, or more with equity investments, and you can diversify yourself out of single property and your local area risks. You are definitely hands-off in CrowdFunding. A downside is you have almost no connection to the property and it can be a lot less fun! 8-)

Good luck!

Jim.

1 Reply

Joseph S.

Investor · Lynchburg, VA · Member since 2016 · 37 posts · 24 votes

10y

Originally posted by @Tom V.:

Hmmm this seems to imply that the responses are 50/50. In reality you have a lot of folks (including 1 PM himself!) who are telling you the fees are too high, and 2 PMs who seem to be just trying to protect their industry telling you that the prices seems fair.

Both of those 2 PMs basic argument is that all you should care about is their service and then the price will be worth it. Doesn't this strike you as a bit odd? I don't know of many industries where people are encouraged to ignore price.

As others have pointed out, more alarming to me than the total dollar amount you would pay this company is the incentive system that it sets up. The misalignment of incentives (e.g., the company being rewarded financially for finding the most expensive repair option) is what is most worrisome, though the total amount paid is too high as well.

2 Reply

Tom V.

OP

IA · Member since 2015 · 304 posts · 152 votes

10y

Originally posted by @James Mc Ree:

@Tom V Why do you want to invest in real estate? Naturally, everyone wants to make money, but it appears you have a time conflict: your growing business potentially versus your real estate empire. You should think about the extent to which you are willing to make that tradeoff and what impact on your business you are willing to accept.

I think there is tremendous value in understanding real estate rental operations with your first or first few properties. Outsourcing all of that means you could learn nothing and become a hostage to your management company. For example, you can replace a gas water heater for $900 or $1800 depending on who you call around my area. It will be the same water heater, same warranty and both jobs will be done well. Which company will the PM firm call? Is it the same if they get a % of cost?

You have probably read that real estate investing is really all about people. Good tenants = good experience, bad tenants = something else. What will your PM firm do for you besides provide screening data? Does the firm select the tenant or you? If the firm selects, do they provide a rent or tenant guarantee? If you select, you need to decide what to do with someone with spotty credit, past drug use and a low credit score. Screening data is cheap. Good screening is invaluable.

Thinking only in terms of money, I think of real estate investing as a bond investment that requires a lot more work than a bond and is sometimes unreliable (vacancy). You hope to get a steady rent with some steady expenses to obtain an annual yield. You might want to consider a more passive investment if that is the extent of your desired involvement. CrowdSourcing real estate might work for you in that case as you can still pull 9% or more with debt, or more with equity investments, and you can diversify yourself out of single property and your local area risks. You are definitely hands-off in CrowdFunding. A downside is you have almost no connection to the property and it can be a lot less fun! 8-)

Good luck!

Jim.

Thanks for the perspective, Jim. You made some interesting points. I'm investing in real estate mainly because I want to change my main income sources over to passive income, rather than active income. Right now my income is completely active income, and if I stop working the money stops coming. This is what I want to change, and why I've chosen to pursue real estate to get me there.

You're right, I do have a time conflict between my current business and my real estate investing plans. It's not that I can't make time to manage my own properties, it just seems to make sense to use PM because of these two reasons.

1. From purely a money standpoint, the cost of property management is well worth it because I can make more money by spending my time working on my business than I would save by managing my own properties.

2. Scaleability. My 10 year goal is 30 properties/doors. Ten in the next 4 years, ten more over the next 3, and ten more over the next 3. I could see managing my own properties up to maybe 10, but after that it really isn't scaleable without hiring help. Since I will need PM eventually, it seems to make sense to use it right from the start.

But, I'm rethinking this because I do agree that there is a tremendous value in learning about my rental property operations first hand, at least in the beginning. Your idea about being held hostage by my property management company was an eye opener. I should have realized that already, as I outsource several aspects of my business, which has also resulted in me being very dependent on those providers and gives me a lot less control in those aspects of my business. It's a trade off though, because those things are necessary to build something that is scaleable.

Right now I'm leaning more toward managing my first few properties myself, and picking up PM services later. I just need to make sure I'm including PM costs in my deal analysis so I can afford it later when I need it.

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Property management advice please

Property management advice please

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